1. Basic Elements of Control Chapter 11

2. The Nature of Control in Organizations Control The regulation of organizational activities so that some targeted element of performance remains within acceptable limits. Provides organizations with indications of how well they are performing in relation to their goals. Control provides a mechanism for adjusting performance to keep organizations moving in the right direction. Copyright © by Houghton Mifflin Company. All rights reserved.20–2

3. The Nature of Control in Organizations (cont’d) The Purpose of Control Control is one of the four basic management functions. The control function, in turn, has four basic purposes. Copyright © by Houghton Mifflin Company. All rights reserved.20–3 Adapt to environmental changeLimit the accumulation of error Control helps the organization Cope with organizational complexityMinimize costs Figure 20.1

4. The Nature of Control in Organizations (cont’d) Types of Controls Areas of Control Physical resources—inventory management, quality control, and equipment control. Human resources—selection and placement, training and development, performance appraisal, and compensation. Information resources—sales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting. Financial resources—managing capital funds and cash flow, collection and payment of debts. Copyright © by Houghton Mifflin Company. All rights reserved.20–4

5. The Nature of Control in Organizations (cont’d) Types of Controls (cont’d) Levels of Control Copyright © by Houghton Mifflin Company. All rights reserved.20–5 Strategic control Structural control Operations control Financial control Figure 20.2

6. The Nature of Control in Organizations (cont’d) Types of Controls (cont’d) Responsibilities for Control Controller—a position in organizations that helps line managers with their control activities. Copyright © by Houghton Mifflin Company. All rights reserved.20–6

7. The Nature of Control in Organizations (cont’d) Steps in the Control Process Copyright © by Houghton Mifflin Company. All rights reserved.20–7 Establish standards Measure performance Compare performance against standards Maintain the status quo Correct the deviation Change standards Determine need for corrective action 2143 Figure 20.3

8. The Nature of Control in Organizations (cont’d) Steps in the Control Process (cont’d) Establish Standards Control standard—a target against which subsequent performance will be compared. Measure Performance Performance measurement is a constant, ongoing process. Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance. Copyright © by Houghton Mifflin Company. All rights reserved.20–8

9. The Nature of Control in Organizations (cont’d) Steps in the Control Process (cont’d) Compare Performance Against Standards Define what is a permissible deviation from the performance standard. Utilize the appropriate timetable for measurement. Determine the Need for Corrective Action Maintain the status quo (do nothing). Correct the deviation to bring operations into compliance with the standard. Change the standard if it was set too high or too low. Copyright © by Houghton Mifflin Company. All rights reserved.20–9

10. The Nature of Control in Organizations (cont’d) Operations Control Copyright © by Houghton Mifflin Company. All rights reserved.20–10 Preliminary control Focus is on inputs to the organizational system InputsTransformationOutputs Screening control Focus is on how inputs are being transformed into outputs Postaction control Focus is on outputs from the organiza- tional system Feedback Figure 20.4

11. Financial Control Control of financial resources (i.e., revenues, shareholder investment) as they flow into the organization, are held by the organization (i.e., working capital, retained earnings), and flow out of the organization (i.e., payment of expenses). Copyright © by Houghton Mifflin Company. All rights reserved.20–11

12. Financial Control (cont’d) Financial Control Budgetary Control Budgets may be established at any organizational level. Budgets are typically for one year or less. Budgets may be expressed in financial terms, units of output, or other quantifiable factors. Budgets serve four purposes: Help managers coordinate resources and projects. Help define the established standards for control. Provide guidelines about the organization’s resources and expectations. Enable the organization to evaluate the performance of managers and organizational units. Copyright © by Houghton Mifflin Company. All rights reserved.20–12

13. Financial Control (cont’d) Types of Budgets Copyright © by Houghton Mifflin Company. All rights reserved.20–13 Table 20.1a

14. Financial Control (cont’d) Types of Budgets (cont’d) Copyright © by Houghton Mifflin Company. All rights reserved.20–14 Table 20.1b

15. Financial Control (cont’d) Types of Budgets (cont’d) Copyright © by Houghton Mifflin Company. All rights reserved.20–15 Table 20.1c

16. Other Tools of Financial Control Financial Statements Financial statement is a profile of some aspect of an organization’s financial circumstances. Balance sheet A listing of assets (current and fixed), liabilities (short- and long-term), and stockholders’ equity at a specific point in time (typically, year-ending) that summarizes the financial condition of the organization. Income statement Summary of financial performance—revenues less expenses as net income (i.e., profit or loss)—over a period of time, usually one year. Copyright © by Houghton Mifflin Company. All rights reserved.20–16

17. Other Tools of Financial Control (cont’d) Ratio Analysis The calculation of one or more financial ratios to assess some aspect of the organization’s financial health. Financial Audits Audit—an independent appraisal of an organization’s accounting, financial, and operational systems. External audits—financial appraisals conducted by experts who are not employees of the organization to verify to external parties that the organization’s financial and accounting procedures are legal and proper. Internal audits—appraisals conducted by employees of the organization to determine the accuracy, efficiency, and appropriateness of financial and accounting procedures. Copyright © by Houghton Mifflin Company. All rights reserved.20–17

18. Structural Control Bureaucratic Control A form of organizational control characterized by formal and mechanistic structural arrangements. Decentralized Control An approach to organizational control characterized by informal and organic structural arrangements. Copyright © by Houghton Mifflin Company. All rights reserved.20–18